Greenspan not to blame?
David Henderson, writing for the Cato Institute, says that Greenspan ran a "tight" monetary policy. So of course he can't be blamed. Robert Murphy has already responded to this claim in a wonderful article.
Some additional thoughts.
First:
Second:
But Henderson says that these are not relevant data. We should instead look at year-on-year change. "Since 2001, the annual year-to-year growth rate of MZM fell from over 20 percent to nearly 0 percent by 2006. During that same time, M2 growth fell from over 10 percent to around 2 percent and M1 growth fell from over 10 percent to negative rates."
Note that he doesn't provide the charts. It turns out that leaping from 2001 to 2006 masks lots of things in between, namely falling from 20% a 10% average rate of growth. MZM stopped growing briefly and then boomed again:
First raw numbers:
Now percent change (and note that a declining pace of increase is not the same as a decrease):
Now M2 raw numbers:
And now percent change:
One final chart shows that Henderson's data showing "tight" growth is actually loose by historical standards. You have to return to the 1980s to find rates of growth change that compare:
Let us look at two more. The adjusted monetary base, which is completely controlled by the Fed:
It is also intriguing to look at Bank Credit of All Commercial Banks, which shows trends that show explosive lending thanks to the low Fed Funds rate, a -no-holds-barred approach that was a direct response to Greenspan's free-for-all policies.
Let us finally look at a more accurate chart of money supply, the TMS, which counts only immediately available money (M1, Total Checkable Deposits, Savings Deposits, U.S. Government Demand Deposits and Note Balances, Demand Deposits Due to Foreign Commercial Banks, and Demand Deposits Due to Foreign Official Institutions).
So we can see that Henderson picked only the data most favorable to his position, and even that is not very favorable, unless you think that 12% and 8% growth is tight. Lest you think that this is an accident, have a look again at the Federal Funds rate.
Comments (15)
ajax
Wow! Henderson and Hummel? - I thought these guys were better than that!!
Published: November 4, 2008 3:49 PM
Frank
Is CATO not a proponent of the Austrian School? Makes me really wonder about all this libertarian infighting, being new to the philosophy.
Published: November 4, 2008 6:20 PM
Brian Macker
Wow, I was blaming Greenspan for the housing bubble before it happened when he dropped the prime rate to 1%. Also this credit crisis which was inevitable. I was also blaming him for the 2001 stock crash in 1998.
Now I'm blaming him and Bernanke for the recesssion and inflation that is to follow.
How could I possibily know all this ahead of time? It's almost like I know a theory that predicts the outcomes of bad policy.
Published: November 4, 2008 6:52 PM
Bruce Koerber
Is there no end to moral relativity? Henderson of the Cato Institute narrows his focus strategically to make Greenspan's actions appear relatively moderate.
It is funny that he states that the Cato Institute is in favor of abolishing the Federal Reserve without clearly stating that it is an immoral and unConstitutional entity. Is that too absolute a statement for a moral relativist?
Published: November 4, 2008 7:09 PM
newsonr
"Years ago, Milton Friedman pointed out one problem with this reasoning by emphasizing the distinction between nominal and real rates. Nominal rates can be low because expected inflation is low, an indicator of tight monetary policy."
or alternatively, the public is educated to look towards cpi/ppi when judging inflation (aren't those chinese t-shirts just dandy? and so cheap, too). how can house/bourse/bond/art inflation be anything but miraculous?
take a bow, maestro!
Published: November 4, 2008 10:58 PM
Joseph K
I concur with Murphy on this issue, but when I first saw that article at Cato my first thought was, "Even if Henderson's right, it doesn't say a lot about the Federal Reserve. Once every century you're lucky enough to get a guy running it who knows what he's doing. The rest of the time, you're screwed." Those aren't odds I like. Of course, it's even worse if 0 times every century you get a guy who knows what he's doing.
Published: November 4, 2008 11:28 PM
jon
frank, CATO does not take policy positions in and of itself, last i checked. only its scholars do. that probably helps insulate their cash flow from this kind of dishonest analysis.
Published: November 5, 2008 8:03 AM
Sheldon Richman
Let's be fair. The paper calls for an end to central banking in no uncertain terms.
Published: November 5, 2008 8:54 AM
Jeffrey Tucker
Sheldon, that's true but it's a classic case of the problem of monetarism: ignoring interest and capital and focusing solely on the money aggregate (which doesn't look so hot either). I mean, it's good that they are against the central bank but the analytics here are extremely misleading.
Published: November 5, 2008 9:00 AM
Michael A. Clem
Sheldon Richman on the Mises blog. Wow! But let's be fairer than fair. The fact that Greenspan gave us "moderate" inflation instead of raging inflation is nothing to cheer about, especially when this inflation is easily avoidable: the Fed simply stops increasing the money supply.
Published: November 5, 2008 9:09 AM
jeffrey
Thinking more about the relationship between an egregiously loose money policy in 2001 and following, one is struck by the real history: post 9-11. The Fed worked hand in hand with the Bush admin to somehow bolster confidence after the terrorism. It is striking that all these years later, we see the financial meltdown, caused not by angry terrorists, but by the Fed's own policies. It seems to confirm the old wisdom that nations are harmed most not from foreign attack but from internal policies such as inflation, debt, and the like.
Published: November 5, 2008 4:41 PM
jeffrey
You can further see from this 1995 Shostak piece that he clearly sees the past and the future of the Fed's conundrum of trying to reverse a loose policy while still maintaining its federal funds target. He predicts clearly here that with a time lag bubbles from the earl 2000s will explode.
Published: November 5, 2008 4:49 PM
Stanley Pinchak
Michael A. Clem,
The Fed has a Congressional mandate to maintain full unemployment and keep inflation under control. Using Keynesian economics they are forced to inflate to keep unemployment low. That's what Keynes said to do. If Congress would stipulate that the Fed had to maintain zero inflation (at least high power money) and not worry about deflation (reflation is still inflation) or unemployment, then you might have a case. I agree with your general sentiment in this regard. Unfortunately if the banks are still free to engage in fractional reserve banking, a business cycle will result anyway.
Published: November 5, 2008 8:22 PM
George
Greenspan isn't to blame, he was hired to be head of the Fed (head of the con) and he performed that role. We're the Fed, we "control inflation" and print money...
In Greenspans book, The Age of Turbulence, there's a passage on page 297 where Greenspan describes his debate with Li Peng and Greenspan told Li Peng that the US tried price controls (under Nixon) but learned that they don't work and learned not to do them.
This conversation was during the period when Greenspan was head of the Fed and controlling US interest rates....
I find it hard to believe that Greenspan didn't realize the disconnect in this.
Published: November 5, 2008 9:56 PM
Rich Paul
I still have an image, in the back of my line, of Greenspan taking office with every intention of breaking the Fiat money system so badly that all the king's horses and all the king's men could not put it together again, and forever ending the illusion that fiat money has value.
I'm not asserting that this *was* his intention. It just amuses me to imagine it. And who knows ... he may have pulled the greatest Randian trick in history, forcing government to confront the consequences of it's policy.
I wonder what we'll be looking back on in 10 years ... the beginning of the end of Fiat money?
The beginning of Socialism in earnest?
The start of the second great depression, which bookended the Age of Socialism in America?
It remains to be seen. Politicians tell themselves "You can fool some of the people all of the time, and you can fool all of the people some of the time, and generally that is enought". Generally, they're right. But not always.
** Met a congressmen who told me
** Sincerity's the Key
** Once you learn to fake that
** You're practically home free.
Published: November 6, 2008 3:16 PM